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The Long-Run Efficiency of Real-Time Electricity Pricing

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  • Severin Borenstein

Abstract

Retail real-time pricing (RTP) of electricity - retail pricing that changes hourly to reflect the changing supply/demand balance - is very appealing to economists because it “sends the right price signals" Economic efficiency gains from RTP, however, are often confused with the short-term wealth transfers from producers to consumers that RTP can create. Abstracting from transfers, I focus on the long-run efficiency gains from adopting RTP in a competitive electricity market. Using simple simulations with realistic parameters, I demonstrate that the magnitude of efficiency gains from RTP is likely to be significant even if demand shows very little elasticity. I also show that “time-of-use" pricing, a simple peak and off-peak pricing system, is likely to capture a very small share of the efficiency gains that RTP offers.

Suggested Citation

  • Severin Borenstein, 2005. "The Long-Run Efficiency of Real-Time Electricity Pricing," The Energy Journal, , vol. 26(3), pages 93-116, July.
    • Handle: RePEc:sae:enejou:v:26:y:2005:i:3:p:93-116
    DOI: 10.5547/ISSN0195-6574-EJ-Vol26-No3-5
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    Cited by:

    1. Mattias Vesterberg & Chandra Kiran B. Krishnamurthy, 2016. "Residential End-use Electricity Demand: Implications for Real Time Pricing in Sweden," The Energy Journal, , vol. 37(4), pages 141-164, October.
    2. Jacob Mays & Diego Klabjan, 2017. "Optimization of Time-Varying Electricity Rates," The Energy Journal, , vol. 38(5), pages 67-92, September.
    3. Pablo Serra, 2024. "The Auction of Contracts by Consumer Groups and the Effect on Market Power," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 64(3), pages 341-359, May.

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